Shares of Sports and Outdoors Academy, Inc. (ASO) have gained 2.7% over the past four weeks to close the last trading session at $40.06, but there could still be a solid upside for the stock if short-term price targets Wall Street analysts are an indication of this. According to the price targets, the average estimate of $51.75 indicates an upside potential of 29.2%.
The average comprises eight short-term price targets ranging from a low of $45 to a high of $60, with a standard deviation of $4.86. While the lower estimate indicates an increase of 12.3% from the current price level, the more optimistic estimate indicates an increase of 49.8%. More than the range, the standard deviation should be noted here, as it helps to understand the variability of the estimates. The smaller the standard deviation, the greater the agreement between analysts.
Although the consensus price target is a highly coveted metric among investors, it may not be wise at all to rely solely on this metric when making an investment decision. Indeed, the ability and impartiality of analysts to set price targets has long been questionable.
But, for ASO, an impressive average price target is not the only indicator of upside potential. The strong consensus among analysts on the company’s ability to report better earnings than they earlier predicted reinforces this view. Although a positive trend in earnings estimate revisions is not a gauge of how much a stock might gain, it has proven powerful in predicting upside.
Here’s what you need to know about analyst price targets
According to researchers from several universities around the world, a price target is one of many pieces of information about a stock that misleads investors far more often than it guides them. In fact, empirical research shows that the price targets set by many analysts, regardless of the degree of agreement, rarely indicate where a stock’s price might actually be headed.
While Wall Street analysts have a deep understanding of a company’s fundamentals and how sensitive its business is to economic and industry issues, many of them tend to set price targets that are overly optimistic. You wonder why ?
They typically do this to generate interest in the stocks of companies with which their companies have existing business relationships or with which they are seeking to associate. In other words, trading incentives from companies covering a stock often result in inflated price targets set by analysts.
However, a tight grouping of price targets, which is represented by a low standard deviation, indicates that analysts have a high degree of agreement on the direction and magnitude of a stock’s price movement. Although this does not necessarily mean that the stock will reach the average price target, it could be a good starting point for further research aimed at identifying potential fundamental driving forces.
That said, while investors shouldn’t ignore price targets entirely, making an investment decision based solely on them could result in a disappointing return on investment. Thus, price targets should always be treated with a high degree of skepticism.
Why ASO could see a solid rise
Analysts’ growing optimism about the company’s earnings outlook, as indicated by the strong agreement among them to revise EPS estimates upwards, could be a legitimate reason to expect the stock to rise. Indeed, empirical research shows a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
For the current year, an estimate has increased in the last 30 days from no negative revision. As a result, the Zacks consensus estimate increased by 4.1%.
Additionally, ASO currently has a Zacks Rank #1 (Strong Buy), meaning it is in the top 5% of over 4,000 stocks that we rank based on four factors related to earnings estimates. Given an impressive externally audited track record, this is a more conclusive indication of the stock’s upside potential in the near term. You can see the full list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>
Therefore, while the consensus price target may not be a reliable indicator of what the ASO might gain, the direction of price movement it implies seems to be a good guide.
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